-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UnXc5mrXmiVOM3IVJl+Sxpe0PG0JCgKh45/92HTM83JZRCHGpBpzroSEeNr/W35L AcDeSAhr7yq5ENdhHuT9qg== 0000950147-00-000735.txt : 20000516 0000950147-00-000735.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950147-00-000735 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINOVA CAPITAL CORP CENTRAL INDEX KEY: 0000043960 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 941278569 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07543 FILM NUMBER: 631535 BUSINESS ADDRESS: STREET 1: 4800 N. SCOTTSDALE RD. STREET 2: PO BOX 2209 CITY: SCOTTSDALE STATE: AZ ZIP: 85251-7623 BUSINESS PHONE: 4806364800 MAIL ADDRESS: STREET 1: 4800 N. SCOTTSDALE RD. STREET 2: P.O. BOX 2209 CITY: SCOTTSDALE STATE: AZ ZIP: 85251-7623 FORMER COMPANY: FORMER CONFORMED NAME: GREYHOUND FINANCIAL CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GREYHOUND LEASING & FINANCIAL CORP DATE OF NAME CHANGE: 19870330 10-Q 1 QUARTERLY REPORT FOR THE QTR ENDED 3-31-00 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20594 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2000 Commission File Number 1-7543 FINOVA CAPITAL CORPORATION (Exact Name of Registrant as Specified in Its Charter) Delaware 94-1278569 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 4800 North Scottsdale Road 85251-7623 Scottsdale, AZ (Zip Code) (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: 480-636-4800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] NO [ ] The Registrant meets the conditions set forth in General Instructions H (i) (a) and (b) of Form 10-Q and is therefore filing this form in the reduced format. APPLICABLE ONLY TO CORPORATE ISSUERS: As of May 12, 2000, 25,000 shares of Common Stock ($1.00 par value) were outstanding. ================================================================================ FINOVA CAPITAL CORPORATION TABLE OF CONTENTS Page No. -------- Part I Financial Information 1 Item 1. Financial Statements. 1 Condensed Statements of Consolidated Income 2 Condensed Statements of Consolidated Cash Flows 3 Notes to Interim Condensed Consolidated Financial Information 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 7 Item 3. Quantitative and Qualitative Disclosure About Market Risk 13 Part II Other Information 14 Item 1. Legal Proceedings 14 Item 6. Exhibits And Reports On Form 8-K. 14 Signatures 15 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FINOVA CAPITAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) March 31, December 31, 2000 1999 ------------ ------------ ASSETS: Cash and cash equivalents $ 38,799 $ 100,344 Investment in financing transactions: Loans and other financing contracts 10,721,268 10,446,356 Leveraged leases 846,640 837,083 Fee-based receivables 707,875 583,885 Operating leases 605,177 592,495 Direct financing leases 600,001 494,175 Financing contracts held for sale 167,983 ------------ ------------ 13,480,961 13,121,977 Less reserve for credit losses (269,339) (264,983) ------------ ------------ Net investment in financing transactions 13,211,622 12,856,994 Investments 434,323 439,507 Goodwill, net of accumulated amortization 361,960 367,241 Other assets 329,730 275,427 ------------ ------------ $ 14,376,434 $ 14,039,513 ============ ============ LIABILITIES: Accounts payable and accrued expenses $ 111,646 $ 161,289 Due to clients 219,057 146,607 Interest payable 99,296 114,397 Senior debt 11,742,426 11,407,767 Deferred income taxes 444,390 461,252 ------------ ------------ 12,616,815 12,291,312 ------------ ------------ Commitments and contingencies SHAREOWNER'S EQUITY: Common stock, $1.00 par value, 100,000 shares authorized, 25,000 shares issued 25 25 Additional capital 1,173,995 1,173,995 Retained income 639,075 638,733 Accumulated other comprehensive income 23,493 33,812 Net advances to parent (76,969) (98,364) ------------ ------------ 1,759,619 1,748,201 ------------ ------------ $ 14,376,434 $ 14,039,513 ============ ============ See notes to interim consolidated condensed financial statements. 1 FINOVA CAPITAL CORPORATION CONDENSED STATEMENTS OF CONSOLIDATED INCOME (Dollars in Thousands) (Unaudited) Three Months Ended March 31, ------------------------ 2000 1999 --------- --------- Interest and income earned from financing transactions $ 339,193 $ 245,222 Operating lease income 27,332 27,853 Interest expense (189,082) (131,183) Operating lease depreciation (15,876) (17,226) --------- --------- Interest margins earned 161,567 124,666 Volume-based fees 12,598 12,735 --------- --------- Operating margin 174,165 137,401 Provision for credit losses (98,000) (9,500) --------- --------- Net interest margins earned 76,165 127,901 Gains on disposal of assets 21,030 12,370 --------- --------- 97,195 140,271 Operating expenses (79,067) (57,499) --------- --------- Income before income taxes 18,128 82,772 Income taxes (6,770) (31,769) --------- --------- NET INCOME $ 11,358 $ 51,003 ========= ========= See notes to interim consolidated condensed financial statements. 2 FINOVA CAPITAL CORPORATION CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in Thousands) (Unaudited) Three Months Ended March 31, 2000 1999 --------- --------- OPERATING ACTIVITIES: Net income $ 11,358 $ 51,003 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 98,000 9,500 Depreciation and amortization 24,501 24,315 Deferred income taxes (9,813) 30,404 Change in assets and liabilities, net of effects from acquisitions Decrease in other assets 17,860 8,677 Decrease in accounts payable and accrued expenses (49,643) (68,472) Decrease in interest payable (15,101) (11,927) Other 717 (14,565) --------- --------- Net cash provided by operating activities 77,879 28,935 --------- --------- INVESTING ACTIVITIES: Proceeds from sales of investments, net of assets 8,965 Proceeds from sales of residual positions, net of gains 2,134 49,128 Proceeds from sales of commercial mortgage backed securities ("CMBS") assets 115,770 Principal collections on financing transactions 578,569 366,679 Expenditures for investments and other income producing activities (28,114) (9,318) Expenditures for financing transactions (898,553) (776,238) Expenditures for CMBS transactions (159,069) Net change in fee-based receivables (123,990) 7,720 Net change in revolving credit facilities (211,803) (324,601) Cash received in acquisitions 20,942 Other 700 739 --------- --------- Net cash used in investing activities (556,322) (824,018) --------- --------- FINANCING ACTIVITIES: Net borrowings under commercial paper and short-term loans 675,329 285,935 Long-term borrowings 120,000 855,000 Repayment of long-term borrowings (461,260) (309,225) Net contributions from Parent 21,395 15,640 Dividends (11,016) (8,967) Net change in due to clients 72,450 (1,786) --------- --------- Net cash provided by financing activities 416,898 836,597 --------- --------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (61,545) 41,514 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 100,344 49,519 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 38,799 $ 91,033 ========= ========= See notes to interim consolidated condensed financial statements. 3 FINOVA CAPITAL CORPORATION NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 NOTE A BASIS OF PREPARATION The consolidated financial statements present the financial position, results of operations and cash flows of FINOVA Capital Corporation and its subsidiaries (collectively, "FINOVA" or the "Company"). FINOVA is a wholly owned subsidiary of the FINOVA Group Inc. ("FINOVA Group"). The interim condensed consolidated financial information is unaudited. In the opinion of management all adjustments, consisting of normal recurring items, necessary to present fairly the financial position as of March 31, 2000, the results of operations for the three months ended March 31, 2000 and 1999 and cash flows for the three months ended March 31, 2000 and 1999, have been included. Interim results of operations are not necessarily indicative of the results of operations for the full year. The enclosed financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. NOTE B SIGNIFICANT ACCOUNTING POLICIES The Company reports other comprehensive income in accordance with Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." Total comprehensive income was $1.0 million and $36.6 million for the three months ended March 31, 2000 and 1999, respectively. The primary component of comprehensive income other than net income was unrealized holding gains (losses). NEW ACCOUNTING STANDARDS In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivatives and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," ("SFAS No. 137"). This statement defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133") standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by recognition of those items as assets or liabilities in the statement of financial position and measurement at fair value. The Company is currently assessing the impact of SFAS No. 133 on the Company's financial position and results of operations. NOTE C SEGMENT REPORTING MANAGEMENT'S POLICY FOR IDENTIFYING REPORTABLE SEGMENTS FINOVA's reportable business segments are strategic business units that offer distinctive products and services that are marketed through different channels. RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS Management evaluates the business performance of each group based on total net revenue, income before allocations and managed assets. Total net revenue is operating margin plus gains on disposal of assets. Income before allocations is income before income taxes, excluding allocation of corporate overhead expenses and the unallocated portion of provision for credit losses. Managed assets include each segment's investment in financing transactions plus securitizations and participations sold. 4 Information for FINOVA's reportable segments reconciles to FINOVA's consolidated totals as follows: Three Months Ended March 31, ---------------------------- (Dollars in Thousands) 2000 1999 ------------ ------------ Total net revenue (loss): Commercial Finance $ 60,762 $ 51,706 Specialty Finance 99,063 94,231 Capital Markets 44,909 9,416 Corporate and other (9,539) (5,582) ------------ ------------ Consolidated total $ 195,195 $ 149,771 ============ ============ Income (loss) before allocations: Commercial Finance $ (41,986) $ 24,348 Specialty Finance 77,316 77,743 Capital Markets 21,809 (17) Corporate and other, overhead and unallocated provision for credit losses (39,011) (19,302) ------------ ------------ Income from continuing operations before income taxes $ 18,128 $ 82,772 ============ ============ March 31, ---------------------------- 2000 1999 ------------ ------------ Managed assets: Commercial Finance $ 4,137,986 $ 3,258,093 Specialty Finance 8,518,738 7,337,715 Capital Markets 925,696 925,366 Corporate and other 93,401 94,477 ------------ ------------ Consolidated total 13,675,821 11,615,651 Less securitizations and participations sold (194,860) (529,635) ------------ ------------ Investment in financing transactions $ 13,480,961 $ 11,086,016 ============ ============ NOTE D PORTFOLIO QUALITY The following table presents a distribution (by line of business) of the Company's investment in financing transactions before the reserve for credit losses at the dates indicated. 5 INVESTMENT IN FINANCING TRANSACTIONS BY LINE OF BUSINESS MARCH 31, 2000 (Dollars in Thousands)
Revenue Accruing Nonaccruing ---------------------------------- ------------------------------- Market Repossessed Repossessed Lease & Total Carrying Rate (1) Impaired Assets (2) Impaired Assets Other Amount % ----------- -------- -------- -------- -------- -------- ----------- ----- Commercial Finance Group Corporate Finance $ 1,099,307 $ 38,198 $ $ 49,054 $ 1,992 $ $ 1,188,551 8.8 Rediscount Finance 1,049,904 10,819 631 3,005 1,064,359 7.9 Business Credit 877,424 9,552 39,178 5,883 932,037 6.9 Distribution & Channel Finance 534,152 11,799 16,149 562,100 4.2 Commercial Services 288,855 2,000 2,912 1,714 295,481 2.2 Growth Finance 51,840 2,184 54,024 0.4 ----------- -------- ------- -------- -------- ------- ----------- ----- 3,901,482 61,549 10,819 110,108 12,594 4,096,552 30.4 ----------- -------- ------- -------- -------- ------- ----------- ----- Specialty Finance Group Transportation Finance 2,490,173 64,674 2,554,847 19.0 Resort Finance 1,543,037 15,378 21,636 1,580,051 11.7 Commercial Equipment Finance 802,886 5,138 13,658 19,934 2,362 843,978 6.3 Franchise Finance 831,606 3,837 4,168 2,348 172 842,131 6.2 Healthcare Finance 761,873 9,442 5,133 53,340 2,711 832,499 6.2 Specialty Real Estate Finance 721,332 35,998 4,155 6,083 152 767,720 5.7 Communications Finance 748,497 3,909 4,394 756,800 5.6 Public Finance 180,926 6,078 103 187,107 1.4 ----------- -------- ------- -------- -------- ------- ----------- ----- 8,080,330 84,103 65,484 79,818 50,001 5,397 8,365,133 62.1 ----------- -------- ------- -------- -------- ------- ----------- ----- Capital Markets Group Realty Capital 455,459 4,614 460,073 3.4 Mezzanine Capital 390,974 10,986 34,929 436,889 3.2 Investment Alliance 24,648 4,086 28,734 0.2 ----------- -------- ------- -------- -------- ------- ----------- ----- 871,081 15,072 39,543 925,696 6.8 ----------- -------- ------- -------- -------- ------- ----------- ----- Other (3) 71,926 1,099 20,555 93,580 0.7 ----------- -------- ------- -------- -------- ------- ----------- ----- TOTAL (4) $12,924,819 $161,823 $76,303 $229,469 $ 62,595 $25,952 $13,480,961 100.0 =========== ======== ======= ======== ======== ======= =========== =====
- ---------- NOTES: (1) Represents original or renegotiated market rate terms, excluding impaired transactions. (2) The Company earned income totaling $1.3 million on repossessed assets year to date during 2000, including $0.6 million in Specialty Real Estate Finance, $0.3 million in Resort Finance, $0.1 million in Healthcare Finance, $0.2 million in Rediscount Finance and $0.1 million in Commercial Equipment Finance. (3) Primarily includes other assets retained from disposed or discontinued operations. (4) Excludes $194.9 million of assets securitized and participations sold which the Company manages, including securitizations of $118.7 million in Franchise Finance and participations of $20.9 million in Corporate Finance, $20.7 million in Public Finance, $13.1 million in Rediscount Finance, $7.9 million in Communications Finance, $5.6 million in Business Credit, $6.3 million in Resort Finance and $1.7 million in Other. 6 RESERVE FOR CREDIT LOSSES: The reserve for credit losses at March 31, 2000 represents 2.0% of the Company's investment in financing transactions and securitized assets. Changes in the reserve for credit losses were as follows: Three Months Ended March 31, ---------------------------- 2000 1999 --------- --------- (Dollars in Thousands) Balance, beginning of period $ 264,983 $ 207,618 Provision for credit losses 98,000 9,500 Write-offs (94,583) (9,142) Recoveries 713 739 Reserves related to acquisitions 245 25,151 Other (19) 4,411 --------- --------- Balance, end of period $ 269,339 $ 238,277 ========= ========= At March 31, 2000 the total carrying amount of impaired loans was $391.3 million, of which $161.8 million were revenue accruing. A reserve for credit losses of $95.7 million has been established for $169.7 million of nonaccruing impaired loans and $32.2 million has been established for $123.6 million of accruing impaired loans. The remaining $141.4 million of the reserve for credit losses is designated for general purposes and represents management's best estimate of inherent losses in the portfolio considering delinquencies, loss experience and collateral. Additions to the general and specific reserves are reflected in current operations. Management may transfer reserves between the general and specific reserves as considered necessary. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 TO THE THREE MONTHS ENDED MARCH 31, 1999 THE FOLLOWING DISCUSSION RELATES TO FINOVA CAPITAL CORPORATION AND ITS SUBSIDIARIES (COLLECTIVELY "FINOVA" OR THE "COMPANY"). FINOVA IS A WHOLLY OWNED SUBSIDIARY OF THE FINOVA GROUP INC. ("FINOVA GROUP"). RESULTS OF OPERATIONS Net income for the three months ended March 31, 2000 was $11.4 million compared to $51.0 million for the three months ended March 31, 1999. Net income was down as a result of an $80 million special charge to pre-tax earnings to bolster and replenish loss reserves and provide payment of deferred compensation and executive severance. The additional loss reserves were added following a first-quarter 2000 write-off related to a $70 million loss on a major customer of FINOVA's Distribution & Channel Finance (DCF) division. The remainder of the charge will be used to provide payment of deferred compensation and executive severance for Samuel L. Eichenfield, FINOVA's former chairman, president and chief executive officer, who retired on March 24, 2000. Excluding the special charge, net income for the first quarter of 2000 would have been $59.7 million, a 17% increase in net income over the comparable 1999 quarter. INTEREST MARGINS EARNED. Interest margins earned represents the difference between (a) interest and income earned from financing transactions and operating lease income and (b) interest expense and depreciation on operating leases. Interest margins earned were up 30% in the first quarter of 2000 compared to the first quarter of 1999 ($161.6 million vs. $124.7 million). The increase was due primarily to portfolio growth (managed assets) which increased by 18%, 21% when excluding $345 million of assets held for sale at Realty Capital at March 31, 1999. Portfolio growth resulted primarily from $4.8 billion of new business added during the 12 months ended March 31, 2000. First-quarter annualized portfolio growth was 7.1%, excluding $168 million of commercial mortgage-backed securities (CMBS) loans held for sale at December 31, 1999. The lower growth rate in the first quarter of 2000, when compared to 22.3% in the same period for 1999, is primarily attributable to lower new-business volume generated by the company's Commercial Finance segment ($108 million in the first quarter of 2000 vs. $346 million in the comparable 1999 quarter), partially offset by an increase in new business volume by the Specialty Finance segment ($834 million in the first quarter of 2000 vs. $648 million during the same period in 1999). The fact that the 2000 new business volume was compared to a much larger beginning portfolio base ($13.6 billion in 2000 vs. $10.6 billion in 1999) also contributed to the lower annualized percentage growth of the portfolio in the first quarter of 2000. Total new business for the first quarter of 2000 was $984 million, down slightly from $1.061 billion in the first quarter of 1999. Interest margins earned as a percent of average earning assets were 7 5.15% in the first quarter of 2000, up slightly from 5.09% in the first quarter of 1999, primarily due to more favorable borrowing costs resulting from lower spreads (approximately 0.17%) on commercial-paper borrowings in the first quarter of 2000 when compared to the first quarter of 1999. To alleviate administrative burdens, FINOVA terminated a $300 million securitization agreement that the company's Corporate Finance division entered into in 1995 and 1996, which has very little economic impact, but does reduce the interest margin percentage by approximately 0.10% going forward. VOLUME-BASED FEES. Volume-based fees are generated by FINOVA's Distribution & Channel Finance, Commercial Services and Realty Capital lines of business. These fees are predominately based on volume-originated business rather than the balance of outstanding financing transactions during the period. Fee-based volume for the first quarter of 2000 was $1.390 billion, down $83 million, or 5.6%, from the $1.473 billion generated in the first quarter of 1999. The decline in volume in 2000 was primarily due to lower CMBS volume, partially offset by higher volume in FINOVA's remaining fee-based businesses. Volume-based fees generated were $12.6 million in the first quarter of 2000 which approximated the $12.7 million earned in the 1999 period, as higher rates earned on that business in 2000 (0.92% vs. 0.86% in 1999) helped mitigate the effects of the lower volume. In April 2000, Realty Capital exited from the origination and sale of commercial real estate loans to the CMBS market. See Recent Developments and Business Outlook for further discussion. PROVISION FOR CREDIT LOSSES. The provision for credit losses was higher in the 2000 quarter ($98.0 million vs. $9.5 million) due to the special $70 million charge to bolster the reserve for credit losses after the DCF loss and due to other write-offs totaling $23.9 million in 2000, which were spread relatively evenly among FINOVA's three operating segments, compared to $8.4 million in 1999. Write-offs, excluding the one-time $70 million charge, as a percent of average managed assets were 0.71% annualized in 2000, up from 0.31% annualized in 1999. Excluding the special charge, the company expects write-offs to range from 0.50% to 0.60% of average managed assets for the full-year 2000. There can be no assurance that these levels will be achieved, depending in part, on conditions that could adversely affect FINOVA's borrowers and their ability to meet their obligations to FINOVA. GAINS ON DISPOSAL OF ASSETS. Gains on disposal of assets were $21.0 million pre-tax in the first quarter of 2000, up 70% from the $12.4 million reported in the first quarter of 1999. Gains in 2000 consisted of $1.1 million from the sale of residuals coming off lease and $19.9 million from the sale of investments and loans, $12.5 million of which came from sales of Healtheon/Web MD stock during the quarter. At March 31, 2000, FINOVA held approximately 924,000 shares of Healtheon/Web MD common stock. While in the aggregate FINOVA has historically recognized gains on such disposals, the timing and amount of these gains are sporadic in nature. There can be no assurance FINOVA will recognize gains in the future, depending, in part, on market conditions at the time of sale. OPERATING EXPENSES. Operating expenses increased to $79.1 million in the first quarter of 2000 from $57.5 million in the comparable 1999 quarter, due to the previously mentioned $10 million accrual for deferred compensation and executive severance, as well as to an increase in personnel costs, principally related to employees added via acquisitions in 1999. Operating efficiency, which is the ratio of operating expenses to operating margins and gains, excluding the special charge for deferred compensation and severance, was 35.4% in 2000, compared to 38.4% in 1999. The improvement is principally due to lower incentive compensation accruals in 2000 related to lower earnings and the decrease in FINOVA Group's stock price. INCOME TAXES. Income taxes were lower for the first three months of 2000 compared to the corresponding period in 1999 primarily due to the decrease in pre-tax income. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Managed assets were $13.68 billion at March 31, 2000 compared to $13.61 billion at December 31, 1999. Included in managed assets at March 31, 2000 were $13.48 billion in funds employed, $118.7 million of securitized assets managed by FINOVA and $76.2 million of participations sold to third parties. The increase in managed assets was due to funded new business of $984.4 million for the three months ended March 31, 2000, partially offset by prepayments and asset sales accompanied by normal portfolio amortization. The reserve for credit losses increased to $269.3 million at March 31, 2000 from $265.0 million at December 31, 1999. At March 31, 2000 and December 31, 1999, the reserve for credit losses represented 2.0% of ending managed assets (excluding participations and financing contracts held for sale). Nonaccruing assets increased to $318.0 million or 2.3% of ending managed assets (excluding participations) at March 31, 2000 from $295.1 million or 2.2% at the end of 1999. The largest account that was moved into this category during the quarter had a balance of approximately $8.8 million. FINOVA's share (approximately $32 million) of a large syndicated credit facility held in Healthcare Finance is the overall largest account in nonaccruing assets. It has been a nonaccruing asset since the third quarter of 1999 and is currently in bankruptcy. FINOVA does not expect any activity that might change the status of this account until late 2000 or early 2001. 8 Revenue accruing impaired assets were $161.8 million or 1.2% of ending funds employed at March 31, 2000, compared to $240.1 million or 1.8% of ending funds employed at December 31, 1999. The largest account in this category was an airline customer from the Transportation Finance line of business with an account balance of approximately $56 million. This customer filed for bankruptcy in the first quarter of 2000. FINOVA's position in the account is secured by Boeing 747 aircraft. FINOVA is negotiating with the trustee for repossession and/or continued use of its collateral. At March 31, 2000, a Healthcare Finance customer was granted a 60-day moratorium on a large credit facility in which FINOVA participated with a group of banks. The account was current at March 31, 2000. FINOVA's exposure is approximately $24 million. Also, in early April, a computer reseller headquartered in Arizona that is a Distribution & Channel Finance customer filed bankruptcy. FINOVA has an exposure of approximately $12 million on this account primarily from an inventory financing line. These two collaterized accounts are being evaluated for any potential impairment. FINOVA's thirty-one to ninety day delinquencies rose from 66 basis points at December 31, 1999 to 108 basis points at March 31, 2000. The increase resulted from the airline customer mentioned above moving into this category. Excluding that customer, delinquencies would have been approximately 65 basis points, consistent with the prior quarter. At March 31, 2000, FINOVA had $11.74 billion of debt outstanding, representing 6.7 times the Company's equity base of $1.76 billion. Included in debt at March 31, 2000 was approximately $4.55 billion of commercial paper and short-term borrowings supported by unused revolving-credit agreements. At year-end 1999, FINOVA's debt was 6.5 times the equity base of $1.75 billion. FINOVA renewed a $500 million, 364-day revolving credit agreement on May 3, 2000. Two additional 364-day commercial paper back-up facilities aggregating $1.6 billion were scheduled to renew on May 16, 2000. FINOVA received commitments to renew approximately $1.1 billion of these facilities. The $1.1 billion, along with the $500 million renewed on May 3rd and $2.4 billion previously in place, was not adequate to provide dollar-for-dollar coverage on $4.3 billion of commercial paper outstanding. As a result, FINOVA notified the lending institutions on May 8, 2000 that it would exercise its term-out option under the $1.6 billion of facilities and draw on these and its other credit agreements, as needed. The proceeds, along with cash flow from operations, will be used to retire debt, satisfy other obligations and to fund new business. The $1.6 billion in borrowings are payable on May 15, 2001. Draws under other credit facilities are due during 2001, 2002 or 2003. Growth in funds employed has been financed by FINOVA's internally generated funds and new borrowings. During the three months ended March 31, 2000, FINOVA issued $120 million of new long-term borrowings and recognized a net increase in commercial paper outstanding of $675.3 million. During the same period, FINOVA repaid $461.2 million of long-term borrowings. Subsequent to quarter end, FINOVA's credit ratings were reduced by Moody's Investor Services, Inc., Standard & Poor's Ratings Group, Fitch Investors Services, Inc. , Duff & Phelps Credit Rating Co. and Dominion Bond Rating Service, which rates FINOVA's debt in Canada. See Recent Developments and Business Outlook for further discussion of the rating agency downgrades. SEGMENT REPORTING FINOVA's business is organized into three market groups, which are also its reportable segments: Commercial Finance, Specialty Finance and Capital Markets. Management principally relies on total revenue, income before allocations and managed assets in evaluating the business performance of each reportable segment. Total revenue is the sum of operating margin and gains on disposal of assets. Income before allocations is income before income taxes, preferred dividends, corporate overhead expenses and the unallocated portion of the provision for credit losses. Managed assets include each segment's investment in financing transactions plus securitizations and participations sold. COMMERCIAL FINANCE. Commercial Finance includes traditional asset-based businesses that provide financing through revolving credit facilities and term loans secured by assets such as receivables and inventories, as well as providing factoring and management services. Total net revenue was $60.8 million in 2000 compared to $51.7 million for the first three months of 1999, an increase of 17.5%. The increase was primarily due to a 27.0% increase in managed assets over the last twelve months, partially offset by the effects of competitive pressures on pricing in the asset-based lending businesses, slower growth rate in volume-based fees and a lower level of prepayment related income and fees. Distribution and Channel Finance had fee-based volume of $831.5 million during the first three months of 2000 compared to $803.5 million in 1999. The rate earned on that volume also increased from 0.93% to 1.00%. Commercial Services' fee-based volume rose to $390.5 million from $285.7 million in 1999, an increase of 36.7%; however, the rate earned on that volume declined to 0.73% from 0.89% for the first three months of 1999. The group also generated a small level of fee-based volume ($11.7 million) by its Growth Finance unit in 2000. 9 Income before allocations declined from $24.3 million in 1999 to a loss of $42.0 million in the first three months of 2000, primarily due to a $70 million special charge to bolster the reserve for credit losses following a first quarter 2000 write-off related to a major customer of DCF. Excluding the special charge, the segment had income before allocations of $28.0 million, an increase of approximately 15%. Net write-offs for the group totaled $78.6 million in the first three months of 2000 compared to $6.1 million in 1999. Excluding the $70 million special charge, net write-offs as an annualized percent of average managed assets for the Commercial Finance Group was 0.86% compared to 0.84% in the first three months of 1999. Managed assets grew to $4.14 billion over the last twelve months from $3.26 billion, an increase of 27.0%. The growth in managed assets was primarily due to the addition of $661.9 million of managed assets acquired in connection with the acquisition of Fremont Financial Corporation and strong growth in the Rediscount Finance operation, which grew 20.3% over the last twelve months. However, the first quarter annualized growth represented a 5.5% decline from year-end 1999. The decline was primarily due to compression in the Corporate Finance/Business Credit portfolio, which dropped nearly 21.0% annualized during the first quarter from $2.27 billion to $2.15 billion. The Commercial Finance Group had new loan business of $108.1 million in the first three months compared to $346.4 million in 1999. The group, which is considered more generalist than FINOVA's more profitable niche-oriented businesses, is expected to slow its growth rate during 2000. The Company as a whole expects to significantly slow managed asset growth on an annual basis. There can be no assurance that FINOVA's asset base will grow, even excluding sales of assets through possible securitizations, which would reduce owned assets. See Recent Developments and Business Outlook for further discussion. SPECIALTY FINANCE. Specialty Finance provides a wide variety of lending products such as leases, loans, accounts receivable and cash flow based financing, as well as servicing and collection services to a number of highly focused industry specific niches. Total net revenue increased 5.1% to $99.1 million in the first three months of 2000 compared to $94.2 million in 1999. The increase was primarily due to 16.1% growth in managed assets over the last twelve months and 12.3% annualized growth during the first quarter, partially offset by the effects of competitive pricing pressures in certain business units and a lower level of gains on disposal of assets during the first quarter of 2000 ($3.0 million in 2000 vs. $9.6 million in 1999). The lower gains were primarily attributable to the timing of assets coming off lease and the company's ability to re-lease assets at end of term. While in the aggregate FINOVA has historically recognized gains on disposals, the timing and amount of these gains are sporadic in nature. Income before allocations was consistent with the prior year at $77.3 million compared to $77.7 million in 1999, primarily due to the lower level of gains and the increase in net write-offs from $2.3 million to $5.8 million in the first quarter of 2000. Net write-offs in 2000 were spread among the business units. Annualized net write-offs as a percentage of average managed assets for the group rose to 0.28% from 0.12%. Managed assets grew to $8.52 billion in the first quarter of 2000 from $7.34 billion in the same period of 1999, an increase of 16.1%. The growth in managed assets was driven by new business of $833.5 million in the first three months of 2000 compared to $648.2 million in 1999. The growth in managed assets was spread across most business units with Franchise Finance, Healthcare Finance, Resort Finance and Transportation Finance all growing in excess of 15% over the last twelve months, while only Public Finance experienced a decline. The group as a whole was able to increase backlog from $1.30 billion to $1.60 billion by the end of the first quarter of 2000. CAPITAL MARKETS. Capital Markets, in conjunction with institutional investors, provides commercial mortgage banking services and debt and equity capital funding. Mezzanine Capital (formerly Sirrom Capital Corporation) was added to this segment late in the first quarter of 1999. Total net revenue was $44.9 million for the first three months of 2000 compared to $9.4 million in 1999. The increase in 2000 was primarily due to the addition of Mezzanine Capital and Harris Williams & Co., both acquired late in the first quarter of 1999. Also contributing to the increase in net revenue was the continued growth of Realty Capital's bridge and mezzanine financing activities, which offset a decline in net revenue generated by Realty Capital's CMBS activities. Realty Capital's bridge and mezzanine financing portfolio grew to $460.1 million by the end of the first quarter of 2000 compared to $84.9 million in 1999. Realty Capital's CMBS volume declined to $140.9 million in the first quarter of 2000 from $383.5 million for the same period in 1999, while the rate earned on that volume increased to 0.75% from 0.41%. In early April, FINOVA repositioned its Realty Capital business by ending the preferred partner program entered into with an investment banker in December 1999 and exiting from the origination and sale of commercial real estate loans to the CMBS market. The Realty Capital division will now focus on its on-balance sheet bridge and mezzanine financing activities. The Company estimates this change to decrease 2000 net income by an estimated $10 million to $13 million. 10 The Mezzanine Capital and Harris Williams & Co. units provided $35.9 million of net revenue during the first three months of 2000 compared to $2.3 million in 1999. The net revenue in 2000 included $20.4 million related to gains from sale of equity and warrant positions. Included in this amount were $12.5 million of gains generated from the sale of Healtheon/WebMD stock. FINOVA recorded a pre-tax unrealized gain of $14.6 million through other comprehensive income on the balance sheet related to 923,832 shares of Healtheon/WebMD stock in its portfolio at March 31, 2000. FINOVA periodically assesses its position in this unit's investment portfolio and will exercise its position based on various factors, including management's discretion. Income before allocations grew to $21.8 million in the first three months of 2000 from a breakeven in 1999. This increase was primarily attributable to the increased net revenue, partially offset by $7.6 million of net write-offs in the Mezzanine Capital portfolio and higher operating expenses due to the addition of Mezzanine Capital and Harris Williams & Co. for an entire quarter. Managed assets remained flat at approximately $925 million despite the elimination of Realty Capital's on-balance sheet CMBS product, which totaled $345.5 million at March 31, 1999. This reduction was offset by $375.2 million of growth in Realty Capital's bridge and mezzanine financing portfolio. The acquired assets of Mezzanine Capital declined to $436.9 million in 2000 from $477.5 million at March 31, 1999. FINOVA expects this portfolio to further compress during the first half of 2000 as it transitions to originating new business using FINOVA's underwriting standards. Loan backlog for the segment as a whole increased to $271.3 million from $160.7 million in 1999. YEAR 2000 COMPLIANCE FINOVA successfully completed all work necessary to make its mission-critical systems Year 2000 compliant in 1999 and experienced no significant problems during the transition to the new year. The Company incurred expenses of $207,000 and capital costs of $1.7 million related to its Year 2000 compliance efforts. No material expenditures related to the Year 2000 issue are expected to be incurred in the future. FINOVA's estimate of future costs does not include time and costs that may be incurred as a result of the failure of any third parties to become Year 2000 compliant. FINOVA monitored activity with customers and others during the first quarter of 2000 to determine if their applications are Year 2000 compliant and to assess the potential impact on FINOVA related to this issue. At the date of this filing, no significant impact has been noted. RECENT DEVELOPMENTS AND BUSINESS OUTLOOK On March 27, 2000, FINOVA Group announced the retirement of its Chairman, President and Chief Executive Officer, Samuel L. Eichenfield, for personal and health reasons. Following Mr. Eichenfield's retirement as a director and officer, The FINOVA Group's board of directors elected Matthew M. Breyne as a director, President and Chief Executive Officer of FINOVA Group. FINOVA's board of directors has elected Mr. Breyne as Chairman, President and Chief Executive Officer of FINOVA. He previously served as President and Chief Operating Officer of FINOVA and continues to serve as a director of the company. FINOVA also announced that it would take a special $80 million pre-tax charge to earnings in the first quarter of 2000 to bolster loss reserves and provide for payment of deferred compensation and executive severance. The additional loss reserves related to a $70 million loss on a major customer in the Distribution and Channel Finance line of business. The remainder of the charge will be used to provide for payment of deferred compensation and executive severance for Mr. Eichenfield. In early April, FINOVA repositioned its Realty Capital business by ending the preferred partner program entered into with a prominent investment banking firm in December 1999 and exiting from the origination and sale of commercial real estate loans to the CMBS market. The Realty Capital division will now focus solely on its on-balance sheet real estate loan products. This change is expected to decrease 2000 net income by an estimated $10 million to $13 million. In early April, FINOVA entered into a $500 million credit facility with various lenders to provide additional liquidity following the announcements noted above. Those facilities required that they be repaid in the event the company borrowed under the commercial paper back-up facilities. FINOVA repaid the amounts borrowed under that facility in May 2000 after it drew upon its other credit agreements, as discussed more fully below. On May 1, 2000, FINOVA issued $105 million of medium term notes. On May 5, 2000, FINOVA renewed a $500 million, 364-day revolving credit agreement. Two additional 364-day commercial paper back-up facilities aggregating $1.6 billion were scheduled to renew on May 16, 2000. FINOVA received commitments to renew approximately $1.1 billion of these facilities. The $1.1 billion, along with the $500 million renewal on May 3rd and $2.4 billion previously in place, was not adequate to provide dollar-for-dollar coverage on $4.3 billion of commercial paper outstanding. As a result, FINOVA notified the lending institutions on May 8, 2000 that it would exercise its term-out option under the $1.6 billion of facilities, which are payable in 364 days, and draw on these and its other credit agreements, as needed. The proceeds, along with cash flow from operations, will be used to retire debt, satisfy other obligations and to fund new business. 11 FINOVA has subsequently been receiving funding under those credit facilities. FINOVA expects that its available credit facilities, cash flow from operations, proceeds from assets available for sale and other resources will be sufficient to satisfy its debt obligations, operational needs and to fund reduced amounts of new business at least through the second quarter of 2001. FINOVA is managing its business to help assure its ability to satisfy those and its other obligation in due course. In light of recent events, on May 8, 2000, FINOVA announced that its board of directors had retained Credit Suisse First Boston to assist the Company with a comprehensive evaluation of its strategic alternatives. After the May 8th announcement, the credit ratings for FINOVA were reduced as follows: Senior Debt Commercial Paper --------------- ------------------- From To From To ---- ---- ---- ---- Moody's Investors Service Inc. Baa1 Baa2 P-2 P-3 Standard & Poor's Ratings Group A- BBB+ A2 Credit Watch Fitch Investors Services, Inc. A BBB F-1 F-2 Duff &Phelps Credit Rating Co. A BBB D-1 D-2 Dominion Bond Rating Service, which rates FINOVA's debt in Canada, reduced its Senior Debt rating from A(low) to BBB(high) and reduced its Commercial Paper rating from R1(low) to R2(high). To supplement internally generated cash flows, the company is evaluating alternative funding sources such as asset-backed facilities and securitizations. The draws on the commercial paper back-up facilities and credit downgrades are expected to decrease 2000 net income by $20 million to $26 million. The costs to exit the CMBS market place, draws on commercial paper back-up facilities and increase in cost of funds are expected to reduce 2000 net income by $30 million to $39 million. FINOVA intends to significantly slow its overall growth rate on an annual basis in an effort to maintain or gradually reduce its debt to equity ratio from the March 31, 2000 level of 6.7:1. There can be no assurance that FINOVA's asset base will grow, even excluding sales of assets through possible securitizations, which would reduce owned assets. FINOVA continues to seek new business by emphasizing customer service, providing competitive interest rates and focusing on selected market niches. NEW ACCOUNTING STANDARDS In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivatives and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," ("SFAS No. 137"). This statement defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133") standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by recognition of those items as assets or liabilities in the statement of financial position and measurement at fair value. The Company is currently assessing the impact of SFAS No.133 on the Company's financial position and results of operations. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements, such as predictions or forecasts. FINOVA assumes no obligation to update those statements to reflect actual results, changes in assumptions or other factors. The forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those predicted. Those factors include: * FINOVA's ability to address its financing requirements in light of its existing debt obligations and market conditions. * Pending and potential litigation relating to the special charge to earnings announced on March 27, 2000. * The results of efforts to implement FINOVA's business strategy, including the evaluation of strategic alternatives. * The ability to attract and retain key personnel and customers. * Conditions that adversely impact FINOVA's borrowers and their ability to meet their obligations to FINOVA. * Other risks detailed in FINOVA's SEC reports, including on page 15 of FINOVA's 10-K for 1999. 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Subsequent to the announcement of the special charge of $80 million to bolster loss reserves and provide for payment of deferred compensation and executive severance and the draws against the Company's commercial paper back-up facilities, FINOVA Capital's credit ratings were downgraded by Moody's Investors Service, Inc., Standard & Poor's Ratings Group, Fitch Investors Services, Inc. and Duff & Phelps Credit Rating Co. The draws on the commercial paper back-up facilities and credit downgrades are expected to decrease 2000 net income by $20 million to $26 million. See Recent Developments and Business Outlook for further discussion. Excluding the effect of the credit downgrades, there were no material changes from the information provided in the report on Form 10-K for the year ended December 31, 1999. 13 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On March 29, 2000, an action was filed in the United States District Court for the Southern District of New York against FINOVA Group, FINOVA and four executive officers, including Samuel Eichenfield, FINOVA Group's former chairman, president and chief executive officer. A similar action was subsequently filed in the United States District Court for the District of Arizona against FINOVA Group and Mr. Eichenfield. The actions purport to be on behalf of the plaintiffs, William K. Steiner and Uri Borenstein, respectively, and all other shareowners who purchased FINOVA Group common stock during the same class period of July 15, 1999 through March 26, 2000. The complaints allege that defendants made materially misleading statements regarding FINOVA's loss reserves relating to one account and otherwise violated the federal securities laws in an effort to bolster FINOVA Group's stock price, among other reasons. The complaints seek unspecified damages, interest and other relief. FINOVA has not had an opportunity to assess the likelihood of success in the matters, but does not expect the actions to have a material adverse impact on the Company's financial condition. FINOVA and the other defendants intend to vigorously defend against the claims. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are filed herewith: Exhibit No. Document - ----------- -------- 12 Computation of Ratio of Income to Fixed Charges (interim period). 27 Financial Data Schedule (b) Reports on Form 8-K: A report on Form 8-K, dated April 19, 2000 was filed by Registrant which reported under Items 5 and 7 the revenues, net income and selected financial data and ratios for the quarter ended March 31, 2000 (unaudited). 14 FINOVA CAPITAL CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FINOVA CAPITAL CORPORATION (Registrant) Dated: May 15, 2000 By: /s/ Bruno A. Marszowski ------------------------------------ Bruno A. Marszowski, Senior Vice President, Chief Financial Officer and Controller Principal Financial and Accounting Officer 15 FINOVA CAPITAL CORPORATION COMMISSION FILE NUMBER 1-7543 EXHIBIT INDEX MARCH 31, 2000 FORM 10-Q Exhibit No. Document - ----------- -------- 12 Computation of Ratio of Income to Fixed Charges (interim period). 27 Financial Data Schedule 16 EX-12 2 COMPUTATION OF RATIO OF INCOME FINOVA CAPITAL CORPORATION COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES (Dollars in Thousands) THREE MONTHS ENDED MARCH 31, ------------------------ 2000 1999 -------- -------- Income before income taxes $ 18,128 $ 82,772 Add fixed charges: Interest expense 189,082 131,183 One-third rentals 1,763 1,111 -------- -------- Total fixed charges 190,845 132,294 -------- -------- Income as adjusted $208,973 $215,066 ======== ======== Ratio of income to fixed charges 1.09 1.63 ======== ======== EX-27 3 FINANCIAL DATA SCHEDULE
9 3-MOS DEC-31-2000 MAR-31-2000 38,799 0 0 0 0 0 0 13,480,961 269,339 14,376,434 0 0 874,389 11,742,426 0 0 25 1,759,594 14,376,434 366,525 0 0 189,082 0 0 161,567 98,000 0 79,067 18,128 0 0 0 11,358 0 0 5.2 318,016 0 0 0 264,983 94,583 713 269,339 0 0 0
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